[Federal Register: May 16, 2006 (Volume 71, Number 94)]
[Notices]
[Page 28326-28334]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16my06-76]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
[Docket No. 06-06]
Office of Thrift Supervision
[No. 2006-20]
FEDERAL RESERVE SYSTEM
[Docket No. OP-1254]
FEDERAL DEPOSIT INSURANCE CORPORATION
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-53773; File No. S7-08-06]
Interagency Statement on Sound Practices Concerning Elevated Risk
Complex Structured Finance Activities
AGENCIES: Office of the Comptroller of the Currency, Treasury (OCC);
Office of Thrift Supervision, Treasury (OTS); Board of Governors of the
Federal Reserve System (Board); Federal Deposit Insurance Corporation
(FDIC); and Securities and Exchange Commission (SEC) (collectively, the
Agencies).
ACTION: Notice of revised interagency statement with request for public
comment.
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SUMMARY: On May 19, 2004, the Agencies issued and requested comment on
a proposed Interagency Statement on Sound Practices Concerning Complex
Structured Finance Activities (``Initial Statement'') of national
banks, state banks, bank holding companies, Federal and state savings
associations, savings and loan holding companies, U.S. branches and
agencies of foreign banks, and SEC registered broker-dealers and
investment advisers (collectively, ``financial institutions'' or
``institutions''). The Initial Statement described some of the internal
controls and risk management procedures that may help financial
institutions identify, manage, and address the heightened reputational
and legal risks that may arise from certain complex structured finance
transactions (``CSFTs''). After reviewing the comments received on the
Initial Statement, the Agencies are requesting comment on a revised
proposed interagency statement (``Revised Statement''). The Revised
Statement has been modified in numerous respects to address issues and
concerns raised by commenters, clarify the purpose, scope and effect of
the statement, and make the statement more principles-based. These
changes include reorganizing and streamlining the document to reduce
redundancies and to focus the statement on those CSFTs that may pose
heightened levels of legal or reputational risk to the relevant
institution (referred to as ``elevated risk CSFTs''). In addition, the
Agencies have modified the examples of transactions that may present
elevated risk to make these examples more risk-focused, and have
recognized more explicitly that an institution's review and approval
process for elevated risk CSFTs should be commensurate with, and focus
on, the potential risks presented by the transaction to the
institution. As discussed below, the Revised Statement will not affect
or apply to the vast majority of small financial institutions, nor does
it create any private rights of action.
DATES: Comments on the Revised Statement should be received on or
before June 15, 2006.
ADDRESSES:
OCC: You should include OCC and Docket Number 06-06 in your
comment. You may submit comments by any of the following methods:
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
OCC Web site: http://www.occ.treas.gov. Click on ``Contact
the OCC,'' scroll down and click on ``Comments on Proposed
Regulations.''
E-mail address: regs.comments@occ.treas.gov.
Fax: (202) 874-4448.
Mail: Office of the Comptroller of the Currency, 250 E
Street, SW., Mail Stop 1-5, Washington, DC 20219.
Hand Delivery/Courier: 250 E Street, SW., Attn: Public
Information Room, Mail Stop 1-5, Washington, DC 20219.
Instructions: All submissions received must include the agency name
(OCC) and docket number or Regulatory Information Number (RIN) for this
notice of proposed rulemaking. In general, OCC will enter all comments
received into the docket without change, including any business or
personal information that you provide.
You may review comments and other related materials by any of the
following methods:
Viewing Comments Personally: You may personally inspect
and photocopy comments at the OCC's Public Information Room, 250 E
Street, SW., Washington, DC. You can make an appointment to inspect
comments by calling (202) 874-5043.
Viewing Comments Electronically: You may request e-mail or
CD-ROM copies of comments that the OCC has received by contacting the
OCC's Public Information Room at: regs.comments@occ.treas.gov.
Docket: You may also request available background
documents and project summaries using the methods described above.
OTS: You may submit comments, identified by No. 2006-20 by any of
the following methods:
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail: regs.comments@ots.treas.gov. Please include No.
2006-20 in the subject line of the message, and include your name and
telephone number in the message.
Fax: (202) 906-6518.
Mail: Regulation Comments, Chief Counsel's Office, Office
of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552,
Attention: No. 2006-20.
Hand Delivery/Courier: Guard's Desk, East Lobby Entrance,
1700 G Street, NW., from 9 a.m. to 4 p.m. on business days, Attention:
Regulation Comments, Chief Counsel's Office, Attention: No. 2006-20.
Instructions: All submissions received must include the agency name
and document number. All comments received will be posted without
change to http://www.ots.treas.gov/pagehtml.cfm?catNumber=67&an=1,
including any personal information provided.
Docket: For access to the docket to read background documents or
comments received, go to http://www.ots.treas.gov/pagehtml.cfm?catNumber=67&an=1.
In addition, you may inspect comments
at the Public Reading Room, 1700 G Street, NW., by appointment. To make
an appointment for access, call (202) 906-5922, send an e-mail to
public.info@ots.treas.gov, or send a facsimile transmission to (202)
906-7755. (Prior notice identifying the materials you will be
requesting will assist us in serving you.) We schedule appointments on
business days between 10 a.m. and 4 p.m. In most cases, appointments
will be available the next business day following the date we receive a
request.
Board: You may submit comments, identified by Docket No. OP-1254,
by any of the following methods:
Board's Web site: http://www.federalreserve.gov Follow the instructions for submitting comments at http://.
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: http//http://www.regulations.gov.
Follow the instructions for submitting comments.
[[Page 28327]]
E-mail: regs.comments@federalreserve.gov. Include docket
number in the subject line of the message.
Fax: (202) 452-3819 or (202) 452-3102.
Mail: Jennifer J. Johnson, Secretary, Board of Governors
of the Federal Reserve System, 20th Street and Constitution Avenue,
NW., Washington, DC 20551.
All public comments are available from the Board's Web site at
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons. Accordingly, your
comments will not be edited to remove any identifying or contact
information. Public comments also may be viewed electronically or in
paper form in Room MP-500 of the Board's Martin Building (C and 20th
Streets, NW.) between 9 a.m. and 5 p.m. on weekdays.
FDIC: Written comments should be addressed to Robert E. Feldman,
Executive Secretary, Attention: Comments/OES, Federal Deposit Insurance
Corporation, 550 17th Street, NW., Washington, DC 20429. Comments may
be hand delivered to the guard station at the rear of the 550 17th
Street Building (located on F Street), on business days between 7 a.m.
and 5 p.m. (Fax number: (202) 898-3838; Internet address:
comments@fdic.gov.) Comments may be inspected and photocopied in the
FDIC Public Information Center, Room 100, 801 17th Street, NW.,
Washington, DC, between 9 a.m. and 4:30 p.m. on business days.
SEC: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/policy.shtml.
;) or Send an e-mail to rule-comments@sec.gov. Please include
File Number S7-08-06 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number S7-08-06. This file number
should be included on the subject line if e-mail is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (http://www.sec.gov/rules/policy.shtml). Comments are
also available for public inspection and copying in the Commission's
Public Reference Room, 100 F Street, NE., Washington, DC 20549. All
comments received will be posted without change; we do not edit
personal identifying information from submissions. You should submit
only information that you wish to make available publicly.
FOR FURTHER INFORMATION CONTACT:
OCC: Kathryn E. Dick, Deputy Comptroller, Credit and Market Risk,
(202) 874-4660; Grace E. Dailey, Deputy Comptroller, Large Bank
Supervision, (202) 874-4610; or Ellen Broadman, Director, Securities
and Corporate Practices Division, (202) 874-5210, Office of the
Comptroller of the Currency, 250 E Street, SW., Washington, DC 20219.
OTS: Fred J. Phillips-Patrick, Director, Credit Policy,
Examinations and Supervision Policy, (202) 906-7295; Deborah S. Merkle,
Project Manager, Credit Policy, Examinations and Supervision Policy,
(202) 906-5688; or David A. Permut, Senior Attorney, Business
Transactions Division, (202) 906-7505, Office of Thrift Supervision,
1700 G Street, NW., Washington, DC 20552.
Board: Sabeth I. Siddique, Assistant Director, (202) 452-3861,
Virginia Gibbs, Senior Supervisory Financial Analyst, (202) 452-2521,
Division of Banking Supervision and Regulation; or Kieran J. Fallon,
Assistant General Counsel, (202) 452-5270, Anne B. Zorc, Attorney,
(202) 452-3876, Legal Division, Board of Governors of the Federal
Reserve System, 20th Street and Constitution Avenue, NW., Washington,
DC 20551. Users of Telecommunication Device for Deaf (TTD) only, call
(202) 263-4869.
FDIC: Jason C. Cave, Associate Director, (202) 898-3548; Division
of Supervision and Consumer Protection; or Mark G. Flanigan, Counsel,
Supervision and Legislation Branch, Legal Division, (202) 898-7426,
Federal Deposit Insurance Corporation, 550 17th Street, NW.,
Washington, DC 20429.
SEC: Mary Ann Gadziala, Associate Director, Office of Compliance
Inspections and Examinations, (202) 551-6207; Catherine McGuire, Chief
Counsel, Linda Stamp Sundberg, Senior Special Counsel (Banking and
Derivatives), or Randall W. Roy, Branch Chief, Division of Market
Regulation, (202) 551-5550, Securities and Exchange Commission, 100 F
Street, NE., Washington, DC 20549.
SUPPLEMENTARY INFORMATION:
I. Background
Financial markets have grown rapidly over the past decade, and
innovations in financial instruments have facilitated the structuring
of cash flows and allocation of risk among creditors, borrowers and
investors in more efficient ways. Financial derivatives for market and
credit risk, asset-backed securities with customized cash flow
features, specialized financial conduits that manage pools of assets,
and other types of structured finance transactions serve important
purposes, such as diversifying risks, allocating cash flows, and
reducing cost of capital. As a result, structured finance transactions,
including the more complex variations of these transactions, now are an
essential part of U.S. and international capital markets.
When a financial institution participates in a CSFT, it bears the
usual market, credit, and operational risks associated with the
transaction. In some circumstances, a financial institution also may
face heightened legal or reputational risks due to its involvement in a
CSFT. For example, a financial institution involved in a CSFT may face
heightened risk if the customer's regulatory, tax or accounting
treatment for the CSFT, or disclosures concerning the CSFT in its
public filings or financial statements, do not comply with applicable
laws, regulations or accounting principles.
In some cases, certain CSFTs appear to have been used in illegal
schemes that misrepresented the financial condition of public companies
to investors and regulatory authorities. Those cases highlight the
substantial legal and reputational risks that financial institutions
may face when they participate in a CSFT that is used by the
institution's customer to circumvent regulatory or financial reporting
requirements or further other illegal behavior.\1\ After conducting
investigations, the OCC, Federal Reserve System and the SEC took strong
and coordinated civil and administrative enforcement actions against
certain financial institutions that engaged in CSFTs that appeared to
have been designed or used to shield their customers' true financial
health from the public. These actions involved significant financial
penalties on the institutions and required the institutions to take
several measures to strengthen their risk management
[[Page 28328]]
procedures for CSFTs.\2\ The complex structured finance relationships
involving these financial institutions also sparked an investigation by
the Permanent Subcommittee on Governmental Affairs of the United States
Senate,\3\ as well as numerous lawsuits by private litigants.
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\1\ For a memorandum on the potential liability of a financial
institution for securities laws violations arising from
participation in a CSFT, see Letter from Annette L. Nazareth,
Director, Division of Market Regulation, Securities and Exchange
Commission, to Richard Spillenkothen and Douglas W. Roeder, dated
December 4, 2003 (available at http://www.federalreserve.gov/boarddocs/srletters/2004/ and http://www.occ.treas.gov).
\2\ See, e.g. In the Matter of Citigroup, Inc., Securities
Exchange Act Release No. 48230 (July 28, 2003), Written Agreement by
and between Citibank, N.A. and the Office of the Comptroller of the
Currency, No. 2003-77 (July 28, 2003) (pertaining to transactions
entered into by Citibank, N.A. with Enron Corp.), and Written
Agreement by and between Citigroup, Inc. and the Federal Reserve
Bank of New York, dated July 28, 2003 (pertaining to transactions
involving Citigroup Inc. and its subsidiaries and Enron Corp. and
Dynegy Inc.); SEC v. J.P. Morgan Chase, SEC Litigation Release No.
18252 (July 28, 2003) and Written Agreement by and among J.P. Morgan
Chase & Co., the Federal Reserve Bank of New York, and the New York
State Banking Department, dated July 28, 2003 (pertaining to
transactions involving J.P. Morgan Chase & Co. and its subsidiaries
and Enron Corp.).
\3\ See Fishtail, Bacchus, Sundance, and Slapshot: Four Enron
Transactions Funded and Facilitated by U.S. Financial Institutions,
Report Prepared by the Permanent Subcomm. on Investigations, Comm.
on Governmental Affairs, United States Senate, S. Rpt. 107-82
(2003).
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Following these investigations, the OCC, Board and SEC also
conducted special reviews of several large banking and securities firms
that are significant participants in the market for CSFTs. These
reviews were designed to evaluate the new product approval, transaction
approval, and other internal controls and processes used by these
institutions to identify and manage the legal, reputational and other
risks associated with CSFTs. These assessments indicated that many of
the large financial institutions engaged in CSFTs already had taken
meaningful steps to improve their control infrastructure relating to
CSFTs. The Agencies also focused attention on the complex structured
finance activities of financial institutions in the normal course of
the supervisory process.
II. Initial Statement
To further assist financial institutions in identifying, managing,
and addressing the risks that may be associated with CSFTs, the
Agencies developed and requested public comment on the Initial
Statement.\4\ As a general matter, the Initial Statement provided that
financial institutions engaged in CSFTs should have and maintain a
comprehensive set of formal, firm-wide policies and procedures that are
designed to allow the institution to identify, document, evaluate, and
control the full range of credit, market, operational, legal, and
reputational risks that may arise from CSFTs. The Initial Statement
also described the types of policies and procedures that financial
institutions should have for CSFTs in the following specific areas: (1)
Transaction approval; (2) approval of new complex structured finance
products; (3) identification and management of the potential
reputational and legal risk associated with CSFTs; (4) review of the
customer's proposed accounting and disclosures for CSFTs; (5)
documentation of CSFTs; (6) management reporting for CSFTs; (7)
independent monitoring and analysis of the institution's compliance
with its internal policies regarding CSFTs; (8) role of internal audit;
and (9) training of personnel involved in CSFTs.
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\4\ See 69 FR 28980, May 19, 2004.
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Among other things, the Initial Statement provided that financial
institutions should establish a clear process for identifying those
CSFTs that may create heightened legal or reputational risk for the
institution, and included a list of transaction characteristics that
may indicate that a CSFT (or series of CSFTs) creates elevated levels
of legal or reputational risk for the institution. The Initial
Statement also provided that an institution should ensure that
transactions identified as being elevated risk CSFTs are thoroughly
reviewed by the institution's control functions and management during
the institution's transaction or new product approval processes. As
part of this review, the Initial Statement indicated that the
institution should obtain and document complete and accurate
information about the customer's business objectives for entering into
the transaction, as well as about the customer's proposed accounting
treatment and financial disclosures relating to the transaction.
III. Overview of Comments
The Agencies collectively received comments on the Initial
Statement from more than 40 persons, although many commenters submitted
multiple comments or submitted identical comments to multiple Agencies.
Commenters included banking organizations, trade associations,
investment banks, consulting firms, public accounting firms, law firms,
an association of state officials, and individuals. In addition to
submitting written comments, some commenters also met with Agency
representatives to discuss their views of the Initial Statement.
Commenters generally supported the Agencies' efforts to describe
the types of risk management procedures and internal controls that may
help financial institutions identify and mitigate the legal and
reputational risks associated with CSFTs. In this regard, many
commenters recognized that financial institutions need a robust risk
management and control framework to help institutions avoid becoming
involved in CSFTs that are used for illegal or abusive purposes and to
manage the risks associated with CSFTs.
Virtually all of the commenters, however, recommended changes to
the Initial Statement. For example, many commenters argued that the
characteristics of CSFTs in general and of elevated risk CSFTs in
particular identified in the Initial Statement were too broad and would
encompass many structured finance products that are not novel or
complex and that do not present heightened legal or reputational risks
for participating financial institutions. These commenters argued, for
example, that the Initial Statement could be read as requiring
financial institutions to identify any structured finance transaction
that involves a special purpose entity (``SPE'') or cross-border
elements as an elevated risk CSFT.
Many commenters also asserted that the internal controls and risk
management processes described in the Initial Statement for CSFTs and
elevated risk CSFTs were overly prescriptive and burdensome. For
example, many commenters expressed concern that the Initial Statement
could be read as requiring a financial institution to conduct a
detailed and extensive pre-transaction review of all CSFTs regardless
of the role that the institution played in the transaction, and
regardless of whether the transaction's characteristics suggested that
it may create significant legal, reputational or other risks for the
institution. Similarly, many commenters argued that the Initial
Statement imposed new and inappropriate obligations on financial
institutions to confirm the validity of a customer's financial
disclosures or accounting or tax treatment for a CSFT, and would
establish new and extensive documentation requirements for CSFTs.
Commenters asserted that, in light of these and other concerns, the
Initial Statement had the potential to increase the legal risks faced
by financial institutions participating in CSFTs. In addition,
commenters argued that the Initial Statement, if implemented, would
disrupt the market for legitimate structured finance products and place
U.S. financial institutions at a competitive disadvantage in the market
for CSFTs both in the United States and abroad.
As a general matter, commenters recommended that the Agencies
modify the Initial Statement to make it more
[[Page 28329]]
principles-based and focused on transactions that may create elevated
risks for a participating financial institution. For example, many
commenters recommended that the Agencies modify the list of
characteristics of elevated risk CSFTs to focus on factors that are
likely indicators that a transaction may, in fact, create heightened
legal or reputational risks for a participating institution. In
addition, commenters recommended that the Agencies provide financial
institutions greater flexibility to design internal controls and risk
management procedures for CSFTs that are tailored to the size,
activities and general internal control framework of the institution.
Finally, many commenters recommended that the Agencies republish a
revised statement for a new round of public comment.
IV. Overview of Revised Statement
The Agencies have substantially revised the Initial Statement in
light of the comments. In particular, the Revised Statement has been
shortened and reorganized to be more principles-based and to focus on
elevated risk CSFTs. Because these revisions are substantial, and the
Revised Statement is an important explanation of the key principles and
best practices governing CSFT activities, the Agencies invite public
comment on the Revised Statement.
The Agencies continue to believe that it is important for a
financial institution engaged in CSFTs to have policies and procedures
that are designed to allow the institution to effectively manage and
address the risks associated with its CSFT activities. These policies
and procedures should, among other things, be designed to allow the
institution to identify during its transaction and new product approval
processes those CSFTs that may present elevated legal or reputational
risks to the institution. In addition, an institution's policies and
procedures should provide that CSFTs identified as potentially having
elevated legal or reputational risks are reviewed by appropriate levels
of control and management personnel at the institution, including
personnel from control areas that are independent of the business
line(s) involved in the transaction. The level and amount of due
diligence conducted by an institution for an elevated risk CSFT should
be commensurate with the transaction's potential risk to the
institution. In conducting this due diligence, the institution may find
it useful or necessary to obtain additional information from the
customer or to obtain specialized advice from qualified in-house or
outside accounting, tax, legal or other professionals.
If, after evaluating an elevated risk CSFT, a financial institution
determines that its participation in the CSFT would create significant
legal or reputational risks for the institution, the financial
institution should take appropriate steps to manage and address these
risks. Such steps may include modifying the transaction or conditioning
the institution's participation in the transaction upon the receipt of
representations or assurances from the customer that reasonably address
the heightened risks presented by the transaction. A financial
institution should decline to participate in an elevated risk CSFT if,
after conducting appropriate due diligence and taking appropriate steps
to address the risks from the transaction, the institution determines
that the transaction presents unacceptable risks to the institution or
would result in a violation of applicable laws, regulations or
accounting principles.
With these broad principles in mind, the Agencies have made a
number of changes to the Initial Statement to address the issues and
concerns raised by commenters, to clarify the purpose, scope and effect
of the Revised Statement, and to make the document more risk-focused.
The Agencies believe that, with these changes, the Revised Statement
promotes sound risk management principles while providing an individual
financial institution greater flexibility to develop implementing
policies, procedures and systems that are appropriately tailored to the
nature, scope, complexity and risks of its CSFT activities and to the
institution's general internal control framework. In particular, the
Agencies have, among other things:
Focused the statement more clearly on those CSFTs that may
present heightened legal or reputational risks to a participating
institution;
Clarified that the statement does not apply to structured
finance transactions, such as standard public mortgage-backed
securities transactions, that are familiar to participants in the
financial markets and have well-established track records and, for this
reason, will not affect or apply to the vast majority of small
financial institutions;
Modified the examples of CSFTs that may warrant additional
scrutiny by an institution to focus on transactions that are more
likely to present elevated levels of legal or reputational risk to an
institution (e.g., transactions that raise concerns that the client
will report or disclose the transaction in its public filings or
financial statements in a manner that is materially misleading);
Clarified that the due diligence conducted by a financial
institution for an elevated risk CSFT should focus on those issues
identified by the institution as potentially creating heightened levels
of legal or reputational risk for the institution;
Recognized that the role a financial institution plays in
a CSFT may affect both the amount of information it has concerning the
transaction and the level of legal or reputational risks presented by
the transaction to the institution;
Streamlined and modified the documentation and general
control portions of the statement to focus on the proper goals of an
institution s policies and procedures in these areas; and
Provided that a financial institution operating in foreign
jurisdictions may tailor its policies and procedures as appropriate to
account for, and comply with, the applicable laws, regulations and
standards of those foreign jurisdictions.
Because many of the core elements of an effective control
infrastructure are the same regardless of the business line involved,
the Revised Statement continues to draw heavily on controls and
procedures that the Agencies previously have found to be effective in
assisting a financial institution to manage and control risks and
identifies ways in which these controls and procedures can be applied
effectively to elevated risk CSFTs. Moreover, as noted above, many of
the large financial institutions that are actively involved in CSFT-
related activities have taken steps in recent years to bolster and
improve their risk management and internal control processes for CSFTs.
Based on the Agencies' supervisory experience, the Agencies believe
that the Revised Statement generally is consistent with the controls
and processes used by large financial institutions to manage the risks
arising from their CSFT activities.
The Agencies propose to adopt the Revised Statement as supervisory
guidance (in the case of the Federal banking agencies) or a policy
statement (in the case of the SEC) and to use the Revised Statement in
reviewing the internal controls and risk management systems of those
financial institutions that are engaged in CSFTs as part of the
Agencies' supervisory processes. Accordingly, the Revised Statement
does not create any private rights of action, nor does it alter or
expand the legal duties and obligations that a financial institution
may have to a customer, its shareholders or other third parties under
applicable law. The
[[Page 28330]]
Agencies have added a statement to this effect in the Revised
Statement.
The Agencies request comment on all aspects of the Revised
Statement.
V. Paperwork Reduction Act
The Agencies have determined that certain provisions of the Revised
Statement contain collection of information requirements as defined in
the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.) (PRA). An
Agency may not conduct or sponsor, and a respondent is not required to
respond to, an information collection unless it displays a currently
valid Office of Management and Budget (OMB) control number.
OMB has reviewed and approved the proposed information collections
for the FDIC, OTS, and OCC; the SEC is submitting their proposed
information collection to OMB for review and approval; and the Board
has reviewed the Revised Statement under the authority delegated to the
Board by OMB (5 CFR 1320, appendix A.1).
OMB control numbers:
OCC: 1557-0229.
OTS: 1550-0111.
FRB: 7100-0311.
FDIC: 3064-0148.
SEC: 3235-0xxx (to be assigned).
Comment was requested on the proposed information collections
contained in the Initial Statement published for comment on May 19,
2004. As discussed above, many commenters asserted that the Initial
Statement in general, and its documentation provisions in particular,
were unduly burdensome and prescriptive. For this reason, some
commenters asserted that the estimates of the burden (100 hours per
respondent) were too low.
In light of this and the modifications made to the Initial
Statement, the Agencies have reconsidered the burden estimates
previously published and are once again requesting comment before
finalizing this statement. In response to the comments, the Agencies
have made significant modifications to make the Revised Statement more
principles-based and risk-focused than the Initial Statement, and to
provide an individual institution greater flexibility in developing
policies, procedures, and systems that are appropriate and tailored to
the nature of the institution's CSFT activities and general internal
control framework. The Agencies believe that the information collection
requirements contained in the Revised Statement, as discussed earlier
in the notice, are generally consistent with the types of policies and
procedures that the large financial institutions actively involved in
CSFTs have already developed and implemented as a matter of usual and
customary business practices. Therefore, the information collections
contained in the Revised Statement are significantly less burdensome
than those estimated in the Initial Statement and, thus, the Agencies
have revised the hourly estimate down from 100 hours per response to an
average of 25 hours per response.
New Estimates
OCC
Number of Respondents: 21.
Estimated Time per Response: 25 hours.
Total Estimated Annual Burden: 525 hours.
OTS
Number of Respondents: 5.
Estimated Time per Response: 25 hours.
Total Estimated Annual Burden: 125 hours.
Board
Number of Respondents: 20.
Estimated Time per Response: 25 hours.
Total Estimated Annual Burden: 500 hours.
FDIC
Number of Respondents: 5.
Estimated Time per Response: 25 hours.
Total Estimated Annual Burden: 125 hours.
SEC
Number of Respondents: 5.
Estimated Time per Response: 25 hours.
Total Estimated Annual Burden: 125 hours.
Comments continue to be invited on:
(a) Whether the collections of information contained in the Revised
Statement are necessary for the proper performance of the Agencies'
functions, including whether the information has practical utility;
(b) The accuracy of the estimates of the burden of the information
collection, including the validity of the methodology and assumptions
used;
(c) Ways to enhance the quality, utility, and clarity of the
information to be collected;
(d) Ways to minimize the burden of the information collection on
respondents, including through the use of automated collection
techniques or other forms of information technology; and
(e) Estimates of capital or start up costs and costs of operation,
maintenance, and purchase of services to provide information.
Comments on the information collections contained in the Revised
Statement should be addressed to:
OCC: You should direct your comments to:
Communications Division, Office of the Comptroller of the Currency,
Public Information Room, Mailstop 1-5, Attention: 1557-0229, 250 E
Street, SW., Washington, DC 20219. In addition, comments may be sent by
fax to (202) 874-4448, or by electronic mail to
regs.comments@occ.treas.gov. You can inspect and photocopy the comments
at the OCC's Public Information Room, 250 E Street, SW., Washington, DC
20219. You can make an appointment to inspect the comments by calling
(202) 874-5043. Additionally, you should send a copy of your comments
to OCC Desk Officer, 1557-0229, by mail to U.S. Office of Management
and Budget, 725, 17th Street, NW., 10235, Washington, DC
20503, or by fax to (202) 395-6974.
You can request additional information or a copy of the collection
from Mary Gottlieb, OCC Clearance Officer, or Camille Dickerson, (202)
874-5090, Legislative and Regulatory Activities Division, Office of the
Comptroller of the Currency, 250 E Street, SW., Washington, DC 20219.
OTS: Information Collection Comments, Chief Counsel's Office,
Office of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552;
send a facsimile transmission to (202) 906-6518; or send an e-mail to
infocollection.comments@ots.treas.gov. OTS will post comments and the
related index on the OTS Internet site at http://www.ots.treas.gov. In
addition, interested persons may inspect the comments at the Public
Reading Room, 1700 G Street, NW., by appointment. To make an
appointment, call (202) 906-5922, send an e-mail to
public.info@ots.treas.gov, or send a facsimile transmission to (202)
906-7755.
To obtain a copy of the submission to OMB, contact Marilyn K.
Burton at marilyn.burton@ots.treas.gov, (202) 906-6467, or fax number
(202) 906-6518, Chief Counsel's Office, Office of Thrift Supervision,
1700 G Street, NW., Washington, DC 20552.
Board: You may submit comments, identified by Docket No. OP-1254,
by any of the following methods:
Agency Web site: http://www.federalreserve.gov. Follow the
instructions for submitting comments at
[[Page 28331]]
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm Federal eRulemaking Portal: http://www.regulations.gov.
http://www.regulations.gov. .
Follow the instructions for submitting comments.
E-mail: regs.comments@federalreserve.gov. Include docket
number in the subject line of the message.
Fax: (202) 452-3819 or (202) 452-3102.
Mail: Michelle Long, Federal Reserve Board Clearance
Officer (202) 452-3829, Division of Research and Statistics, Board of
Governors of the Federal Reserve System, Washington, DC 20551.
Telecommunications Device for the Deaf (TDD) users may contact (202)
263-4869, Board of Governors of the Federal Reserve System, Washington,
DC 20551.
All public comments are available from the Board's Web site at
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons. Accordingly, your
comments will not be edited to remove any identifying or contact
information. Public comments may also be viewed electronically or in
paper in Room MP-500 of the Board's Martin Building (20th and C
Streets, NW.) between 9 a.m. and 5 p.m. on weekdays.
FDIC: Interested parties are invited to submit written comments to
the FDIC concerning the Paperwork Reduction Act implications of this
proposal. Such comments should refer to ``Complex Structured Financial
Transactions, 3064-0148.'' Comments may be submitted by any of the
following methods:
http://www.FDIC.gov/regulations/laws/federal/propose.html.. E-mail: comments@FDIC.gov. Include Complex
Structured Financial Transactions, 3064-0148 in the subject line of the message.
Mail: Steven F. Hanft (202) 898-3907, Federal Deposit
Insurance Corporation, 550 17th Street, NW., Washington, DC 20429.
Hand Delivery: Comments may be hand-delivered to the guard
station at the rear of the 17th Street Building (located on F Street),
on business days between 7 a.m. and 5 p.m.
SEC: You should direct your comments to: Office of Management and
Budget, Attention Desk Officer of the Securities and Exchange
Commission, Office of Information and Regulatory Affairs, Room 10102,
New Executive Office Building, Washington, DC 20503, with a copy sent
to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100
F Street, NE., Washington, DC 20549-1090 with reference to File No. S7-
08-06.
The proposed Revised Statement follows:
Interagency Statement on Sound Practices Concerning Elevated Risk
Complex Structured Finance Activities
I. Introduction
Financial markets have grown rapidly over the past decade, and
innovations in financial instruments have facilitated the structuring
of cash flows and allocation of risk among creditors, borrowers and
investors in more efficient ways. Financial derivatives for market and
credit risk, asset-backed securities with customized cash flow
features, specialized financial conduits that manage pools of assets
and other types of structured finance transactions serve important
business purposes, such as diversifying risks, allocating cash flows,
and reducing cost of capital. As a result, structured finance
transactions now are an essential part of U.S. and international
capital markets. Financial institutions have played and continue to
play an active and important role in the development of structured
finance products and markets, including the market for the more complex
variations of structured finance products.
When a financial institution participates in a complex structured
finance transaction (``CSFT''), it bears the usual market, credit, and
operational risks associated with the transaction. In some
circumstances, a financial institution also may face heightened legal
or reputational risks due to its involvement in a CSFT. For example, in
some circumstances, a financial institution may face heightened legal
or reputational risk if a customer's regulatory, tax or accounting
treatment for a CSFT, or disclosures concerning the CSFT in its public
filings or financial statements, do not comply with applicable laws,
regulations or accounting principles. Indeed, some financial
institutions have incurred significant legal costs and liability and
suffered reputational harm due to their role in certain transactions
that were used by customers to misrepresent the customers' financial
condition to investors, regulatory authorities or others. Reputational
risk poses a significant threat to financial institutions because the
nature of their business requires them to maintain the confidence of
customers, creditors and the general marketplace.
The Office of the Comptroller of the Currency, the Office of Thrift
Supervision, the Board of Governors of the Federal Reserve System, the
Federal Deposit Insurance Corporation, and the Securities and Exchange
Commission (the regulatory Agencies) have long expected financial
institutions to develop and maintain robust control infrastructures
that enable them to identify, evaluate and address the risks associated
with their business activities. Financial institutions also must
conduct their activities in accordance with applicable statutes and
regulations.
II. Scope and Purpose of Statement
The regulatory Agencies are issuing this Statement to describe the
types of risk management principles that we believe may help a
financial institution to identify CSFTs that may pose heightened legal
or reputational risks to the institution (``elevated risk CSFTs'') and
to evaluate, manage and address these risks within the institution's
internal control framework.\5\
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\5\ As used in this Statement, the term ``financial
institution'' or ``institution'' refers to national banks in the
case of the Office of the Comptroller of the Currency; federal and
state savings associations and savings and loan holding companies in
the case of the Office of Thrift Supervision; state member banks and
bank holding companies (other than foreign banking organizations) in
the case of the Federal Reserve Board; state nonmember banks in the
case of the Federal Deposit Insurance Corporation; and registered
broker-dealers and investment advisers in the case of the Securities
and Exchange Commission. The U.S. branches and agencies of foreign
banks supervised by the Office of the Comptroller, the Federal
Reserve Board and the Federal Deposit Insurance Corporation also are
considered to be financial institutions for purposes of this
Statement.
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Structured finance transactions encompass a broad array of products
with varying levels of complexity. Most structured finance
transactions, such as standard public mortgage-backed securities
transactions, public securitizations of retail credit cards, asset-
backed commercial paper conduit transactions, and hedging-type
transactions involving ``plain vanilla'' derivatives and collateralized
loan obligations, are familiar to participants in the financial
markets, and these vehicles have a well-established track record. These
transactions typically would not be considered CSFTs for the purpose of
this Statement.
Because this Statement focuses on sound practices related to CSFTs
that may create heightened legal or reputational risks--transactions
that typically are conducted by a limited number of large financial
institutions--it will not affect or apply to the vast majority of
financial institutions, including most small institutions. As in all
cases, a financial institution should tailor its internal controls so
that they are appropriate in light of the nature, scope, complexity and
risks of its
[[Page 28332]]
activities. Thus, for example, an institution that is actively involved
in structuring and offering CSFTs that may create heightened legal or
reputational risk for the institution should have a more formalized and
detailed control framework than an institution that participates in
these types of transactions less frequently. The internal controls and
procedures discussed in this Statement are not all inclusive, and, in
appropriate circumstances, an institution may find that other controls,
policies, or procedures are appropriate in light of its particular CSFT
activities.
Because many of the core elements of an effective control
infrastructure are the same regardless of the business line involved,
this Statement draws heavily on controls and procedures that the
Agencies previously have found to be effective in assisting a financial
institution to manage and control risks and identifies ways in which
these controls and procedures can be effectively applied to elevated
risk CSFTs. Although this Statement highlights some of the most
significant risks associated with elevated risk CSFTs, it is not
intended to present a full exposition of all risks associated with
these transactions. Financial institutions are encouraged to refer to
other supervisory guidance prepared by the Agencies for further
information concerning market, credit, operational, legal and
reputational risks as well as internal audit and other appropriate
internal controls.
This Statement does not create any private rights of action, and
does not alter or expand the legal duties and obligations that a
financial institution may have to a customer, its shareholders or other
third parties under applicable law. At the same time, adherence to the
principles discussed in this Statement would not necessarily insulate a
financial institution from regulatory action or any liability the
institution may have to third parties under applicable law.
III. Identification and Review of Elevated Risk Complex Structured
Finance Transactions
A financial institution that engages in CSFTs should maintain a set
of formal, firm-wide policies and procedures that are designed to allow
the institution to identify, evaluate, assess, document, and control
the full range of credit, market, operational, legal and reputational
risks associated with these transactions. These policies may be
developed specifically for CSFTs, or included in the set of broader
policies governing the institution generally. A financial institution
operating in foreign jurisdictions may tailor its policies and
procedures as appropriate to account for, and comply with, the
applicable laws, regulations and standards of those jurisdictions.\6\
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\6\ In the case of U.S. branches and agencies of foreign banks,
the institution should coordinate these policies with the foreign
bank's group-wide policies developed in accordance with the rules of
the foreign bank's home country supervisor. In addition, the U.S.
branches and agencies of foreign banks should implement a control
infrastructure for CSFTs, including management, review and approval
requirements, that is consistent with the institution's overall
corporate and management structure as well as its framework for risk
management and internal controls.
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A financial institution's policies and procedures should establish
a clear framework for the review and approval of individual CSFTs.
These policies and procedures should set forth the responsibilities of
the personnel involved in the origination, structuring, trading,
review, approval, documentation, verification, and execution of CSFTs.
Financial institutions may find it helpful to incorporate the review of
new CSFTs into their existing new product policies. In this regard, a
financial institution should define what constitutes a ``new'' complex
structured finance product and establish a control process for the
approval of such new products. In determining whether a CSFT is new, a
financial institution may consider a variety of factors, including
whether it contains structural or pricing variations from existing
products, whether the product is targeted at a new class of customers,
whether it is designed to address a new need of customers, whether it
raises significant new legal, compliance or regulatory issues, and
whether it or the manner in which it would be offered would materially
deviate from standard market practices. An institution's policies
should require new complex structured finance products to receive the
approval of all relevant control areas that are independent of the
profit center before the product is offered to customers.
A. Identifying Elevated Risk CSFTs
As part of its transaction and new product approval controls, a
financial institution should establish and maintain policies,
procedures and systems to identify elevated risk CSFTs. Because of the
potential risks they present to the institution, transactions or new
products identified as elevated risk CSFTs should be subject to
heightened reviews during the institution's transaction or new product
approval processes. Examples of transactions that an institution may
determine warrant this additional scrutiny are those that (either
individually or collectively) appear to the institution during the
ordinary course of its transaction approval or new product approval
process to:
Lack economic substance or business purpose;
Be designed or used primarily for questionable accounting,
regulatory, or tax objectives, particularly when the transactions are
executed at year end or at the end of a reporting period for the
customer;
Raise concerns that the client will report or disclose the
transaction in its public filings or financial statements in a manner
that is materially misleading or inconsistent with the substance of the
transaction or applicable regulatory or accounting requirements;
Involve circular transfers of risk (either between the
financial institution and the customer or between the customer and
other related parties) that lack economic substance or business
purpose;
Involve oral or undocumented agreements that, when taken
into account, would have a material impact on the regulatory, tax, or
accounting treatment of the related transaction, or the client s
disclosure obligations; \7\
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\7\ This item is not intended to include traditional, non-
binding ``comfort'' letters or assurances provided to financial
institutions in the loan process where, for example, the parent of a
loan customer states that the customer (i.e., the parent's
subsidiary) is an integral and important part of the parent's
operations.
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Have material economic terms that are inconsistent with
market norms (e.g., deep in the money options or historic rate
rollovers); or
Provide the financial institution with compensation that
appears substantially disproportionate to the services provided or
investment made by the financial institution or to the credit, market
or operational risk assumed by the institution.
The examples listed previously are provided for illustrative
purposes only, and the policies and procedures established by financial
institutions may differ in how they seek to identify elevated risk
CSFTs. The goal of each institution's policies and procedures, however,
should remain the same--to identify those CSFTs that warrant additional
scrutiny in the transaction or new product approval process due to
concerns regarding legal or reputational risks.
Financial institutions that structure or market, act as an advisor
to a customer regarding, or otherwise play a substantial role in a
transaction may have more information concerning the
[[Page 28333]]
customer's business purpose for the transaction and any special
accounting, tax or financial disclosure issues raised by the
transaction than institutions that play a more limited role. Thus, the
ability of a financial institution to identify the risks associated
with an elevated risk CSFT may differ depending on its role.
B. Due Diligence, Approval and Documentation Process for Elevated Risk
CSFTs
Having developed a process to identify elevated risk CSFTs, a
financial institution should implement policies and procedures to
conduct a heightened level of due diligence for these transactions. The
financial institution should design these policies and procedures to
allow personnel at an appropriate level to understand and evaluate the
potential legal or reputational risks presented by the transaction to
the institution and to manage and address any heightened legal or
reputational risks ultimately found to exist with the transaction.
Due Diligence. If a CSFT is identified as an elevated risk CSFT,
the institution should carefully evaluate and take appropriate steps to
address the risks presented by the transaction with a particular focus
on those issues identified as potentially creating heightened levels of
legal or reputational risk for the institution. In general, a financial
institution should conduct the level and amount of due diligence for an
elevated risk CSFT that is commensurate with the level of risks
identified. A financial institution that structures or markets an
elevated risk CSFT to a customer, or that acts as an advisor to a
customer or investors concerning an elevated risk CSFT, may have
additional responsibilities under the federal securities laws, the
Internal Revenue Code, state fiduciary laws or other laws or
regulations and, thus, may have greater legal and reputational risk
exposure with respect to an elevated risk CSFT than a financial
institution that acts only as a counterparty for the transaction.
Accordingly, a financial institution may need to exercise a higher
degree of care in conducting its due diligence when the institution
structures or markets an elevated risk CSFT or acts as an advisor
concerning such a transaction than when the institution plays a more
limited role in the transaction.
To appropriately understand and evaluate the potential legal and
reputational risks associated with an elevated risk CSFT that a
financial institution has identified, the institution may find it
useful or necessary to obtain additional information from the customer
or to obtain specialized advice from qualified in-house or outside
accounting, tax, legal, or other professionals. As with any
transaction, an institution should obtain satisfactory responses to its
material questions and concerns prior to consummation of a
transaction.\8\
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\8\ Of course, financial institutions also should ensure that
their own accounting for transactions complies with applicable
accounting standards, consistently applied.
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In conducting its due diligence for an elevated risk CSFT, a
financial institution should independently analyze the potential risks
to the institution from both the transaction and the institution's
overall relationship with the customer. Institutions should not
conclude that a transaction identified as being an elevated risk CSFT
involves minimal or manageable risks solely because another financial
institution will participate in the transaction or because of the size
or sophistication of the customer or counterparty. Moreover, a
financial institution should carefully consider whether it would be
appropriate to rely on opinions or analyses prepared by or for the
customer concerning any significant accounting, tax or legal issues
associated with an elevated risk CSFT.
Approval Process. A financial institution's policies and procedures
should provide that CSFTs identified as having elevated legal or
reputational risk are reviewed and approved by appropriate levels of
control and management personnel. The designated approval process for
such CSFTs should include representatives from the relevant business
line(s) and/or client management, as well as from appropriate control
areas that are independent of the business line(s) involved in the
transaction. The personnel responsible for approving an elevated risk
CSFT on behalf of a financial institution should have sufficient
experience, training and stature within the organization to evaluate
the legal and reputational risks, as well as the credit, market and
operational risks to the institution.
The institution's control framework should have procedures to
deliver the necessary or appropriate information to the personnel
responsible for reviewing or approving an elevated risk CSFT to allow
them to properly perform their duties. Such information may include,
for example, the material terms of the transaction, a summary of the
institution's relationship with the customer, and a discussion of the
significant legal, reputational, credit, market and operational risks
presented by the transaction.
Some institutions have established a senior management committee
that is designed to involve experienced business executives and senior
representatives from all of the relevant control functions within the
financial institution, including such groups as independent risk
management, accounting, policy, legal, compliance, and financial
control, in the oversight and approval of CSFTs identified as having
elevated risks. While this type of management committee may not be
appropriate for all financial institutions, a financial institution
should establish processes that assist the institution in consistently
managing its elevated risk CSFTs on a firm-wide basis.\9\
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\9\ The control processes that a financial institution
establishes for CSFTs should take account of, and be consistent
with, any informational barriers established by the institution to
manager potential conflicts of interests, insider trading or other
concerns.
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If, after evaluating an elevated risk CSFT, the financial
institution determines that its participation in the CSFT would create
significant legal or reputational risks for the institution, the
institution should take appropriate steps to address those risks. Such
actions may include declining to participate in the transaction, or
conditioning its participation upon the receipt of representations or
assurances from the customer that reasonably address the heightened
legal or reputational risks presented by the transaction. Any
representations or assurances provided by a customer should be obtained
before a transaction is executed and be received from, or approved by,
an appropriate level of the customer's management. A financial
institution should decline to participate in an elevated risk CSFT if,
after conducting appropriate due diligence and taking appropriate steps
to address the risks from the transaction, the institution determines
that the transaction presents unacceptable risk to the institution or
would result in a violation of applicable laws, regulations or
accounting principles.
Documentation. The documentation that financial institutions use to
support CSFTs is often highly customized for individual transactions
and negotiated with the customer. Careful generation, collection and
retention of documents associated with elevated risk CSFTs are
important control mechanisms that may help an institution monitor and
manage the legal, reputational, operational, market, and credit risks
associated with the transaction. In addition, sound
[[Page 28334]]
documentation practices may help reduce unwarranted exposure to the
financial institution's reputation.
A financial institution should create and collect sufficient
documentation to allow the institution to:
Document the material terms of the transaction;
Enforce the material obligations of the counterparties;
Confirm that customers have received any required
disclosures concerning the transaction; and
Verify that the institution s policies and procedures are
being followed and allow the internal audit function to monitor
compliance with those policies and procedures.
When an institution's policies and procedures require an elevated
risk CSFT to be submitted for approval to senior management, the
institution should maintain the transaction-related documentation
provided to senior management as well as other documentation that
reflect management's approval (or disapproval) of the transaction, any
conditions imposed by senior management, and the reasons for such
action. The institution should retain documents created for elevated
risk CSFTs in accordance with its record retention policies and
procedures as well as applicable statutes and regulations.
C. Other Risk Management Principles for Elevated Risk CSFTs
General Business Ethics. The board and senior management of a
financial institution also should establish a ``tone at the top''
through both actions and formalized policies that sends a strong
message throughout the financial institution about the importance of
compliance with the law and overall good business ethics. The board and
senior management should strive to create a firm-wide corporate culture
that is sensitive to ethical or legal issues as well as the potential
risks to the financial institution that may arise from unethical or
illegal behavior. This kind of culture coupled with appropriate
procedures should reinforce business-line ownership of risk
identification, and encourage personnel to move ethical or legal
concerns regarding elevated risk CSFTs to appropriate levels of
management. In appropriate circumstances, financial institutions may
also need to consider implementing mechanisms to protect personnel by
permitting the confidential disclosure of concerns.\10\ As in other
areas of financial institution management, compensation and incentive
plans should be structured, in the context of elevated risk CSFTs, so
that they provide personnel with appropriate incentives to have due
regard for the legal, ethical and reputational risk interests of the
institution.
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\10\ The agencies note that the Sarbanes-Oxley Act of 2002
requires companies listed on a national securities exchange or
inter-dealer quotation system of a national securities association
to establish procedures that enable employees to submit concerns
regarding questionable accounting or auditing matters on a
confidential, anonymous basis. See 15 U.S.C. 78j-1(m).
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Monitoring Compliance with Internal Policies and Procedures. The
events of recent years evidence the need for an effective oversight and
review program for elevated risk CSFTs. Financial institutions should
conduct periodic independent reviews of their CSFT activities to verify
that their policies and controls relating to elevated risk CSFTs are
being implemented effectively and that elevated risk CSFTs are
accurately identified and receive proper approvals. Such monitoring may
include more frequent assessments of the risk arising from elevated
risk CSFTs, both individually and within the context of the overall
customer relationship, and the results of this monitoring should be
provided to an appropriate level of management in the financial
institution.
Training. An institution should identify relevant personnel who may
need specialized training regarding CSFTs to be able to effectively
perform their oversight and review responsibilities. Appropriate
training on the financial institution's policies and procedures for
handling elevated risk CSFTs is critical. Financial institution
personnel involved in CSFTs should be familiar with the institution's
policies and procedures concerning elevated risk CSFTs, including the
processes established by the institution for identification and
approval of elevated risk CSFTs and new complex structured finance
products and for the elevation of concerns regarding transactions or
products to appropriate levels of management. Financial institution
personnel should be trained to identify and properly handle elevated
risk CSFTs that may result in a violation of law.
Audit. The internal audit department of any financial institution
is integral to its defense against fraud, unauthorized risk taking and
damage to the financial institution's reputation. The internal audit
department of a financial institution should regularly audit the
financial institution's adherence to its own control procedures
relating to elevated risk CSFTs, and further assess the adequacy of its
policies and procedures related to elevated risk CSFTs. Internal audit
should periodically validate that business lines and individual
employees are complying with the financial institution's standards for
elevated risk CSFTs and appropriately identifying any exceptions. This
validation should include transaction testing for elevated risk CSFTs.
Reporting. A financial institution's policies and procedures should
provide for the appropriate levels of management and the board of
directors to receive sufficient information and reports concerning the
institution's elevated risk CSFTs to perform their oversight functions.
IV. Conclusion
Structured finance products have become an essential and important
part of the U.S. and international capital markets, and financial
institutions have played an important role in the development of
structured finance markets. In some instances, however, CSFTs have been
used to misrepresent a customer's financial condition to investors and
others, and financial institutions involved in these transactions have
sustained significant legal and reputational harm. In light of the
potential legal and reputational risks associated with CSFTs, a
financial institution should have effective risk management and
internal control systems that are designed to allow the institution to
identify elevated risk CSFTs, to evaluate, manage and address the risks
arising from such transactions, and to conduct those activities in
compliance with applicable law.
Dated: May 4, 2006.
John C. Dugan,
Comptroller of the Currency.
Dated: May 8, 2006.
By the Office of Thrift Supervision.
John M. Reich,
Director.
By order of the Board of Governors of the Federal Reserve
System, May 9, 2006.
Jennifer J. Johnson,
Secretary of the Board.
Dated at Washington, DC, the 9th day of May, 2006.
By order of the Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
Dated: May 9, 2006.
By the Securities and Exchange Commission.
Nancy M. Morris,
Secretary.
[FR Doc. 06-4510 Filed 5-15-06; 8:45 am]
BILLING CODE 4810-33-P